Pricing People into the Market: Targeting through Mechanism Design

Subsidy programs are typically accompanied by large costs due to the difficulty of screening those who should receive the program from those who would have purchased the good anyway. We design and implement a platform intended to increase the take-up of improved sanitation services by targeting the poorest households for subsidies. The project proceeds in two stages: we first create a demand model based on market data and a demand elicitation experiment, and use the model to predict prices that will maximize take-up subject to an expected budget constraint. We then test the modeled prices on a new sample of households. A main feature of the platform is that prices are designed to exclude or raise revenue from households that would likely have otherwise purchased the improved service, while channelling subsidies to households that might otherwise be unable to pay. We provide evidence that the targeting strategy successfully identified households who would otherwise have failed to purchase improved services. Households in the treatment group were 1.7 percentage points more likely to purchase a mechanical desludging, leading to an increase of market share of mechanical desludging of 5.1 percentage points. The increased probability of purchasing a mechanical desludging among those with the largest subsidies was 3 percentage points. The health impacts among the poorest were large: high subsidy households saw a decrease in the probability that one of their children had diarrhea of 7.1 percentage points. ∗Johnson is assistant professor of economics at the University of Notre Dame. Lipscomb is assistant professor of economics and public policy at University of Virginia’s Batten School and the Department of Economics. We thank Shoshana Griffith, Adrien Pawlik and Adama Sankoudouma for excellent research assistance. We are grateful to the Bill and Melinda Gates Foundation for funding this project and research. We are grateful for helpful comments from Taryn Dinkelman, Pascaline Dupas, Joe Kaboski, Isaac Mbiti, Laura Schechter, and conference participants at the Gates Foundation Workshop, Midwest International Development Conference, NBER Dev Summer meetings, University of Notre Dame, and William and Mary.